Why Alberta is broke

Hey there, time traveller!This article was published 5/3/2013 (1374 days ago), so information in it may no longer be current.

CALGARY — The red-ink budgets that have engulfed Alberta since the last recession — Alberta’s Finance Minister Doug Horner just announced this year’s deficit could hit $4-billion — are not just the result of weaker resource revenues, as Alberta Premier Alison Redford regularly claims.

That explanation ignores the other half of the ledger — the spending side. And it is here where the rest of Canada should use Alberta’s budgetary fall closely as a cautionary tale. In particular, watch the kind of contract deals your government signs with the public sector because that’s where most tax dollars are spent.

Before detailing how Alberta has gone from ballooning surpluses to massive deficits, in part due to spending, let’s examine the assertion that drops in revenue caused Alberta’s red ink. To do that, take a look Alberta’s most recent boom years, arguably in the middle part of the last decade.

Back in 2005/06, resource revenues flowing into Alberta’s provincial coffers hit a peak of $17.1 billion. As of the budget estimate for this current year (2012/13), such revenues will be $11.2 billion (all figures adjusted for inflation to 2012 dollars). That figure may sink lower if recent emanations from the provincial government are correct.

So did the decline in resource revenues affect the province’s ability to balance the budget? Yes.

But now let’s take a look at the other side of the ledger, the spending side. The public should know that much of what governments spend goes to programs (roughly 85 per cent in Alberta) and much of that is spent on public-sector compensation.

Alberta does not estimate how much of its total budget ends up in the form of wages and benefits for the broad public sector.

Last year, however, the Ontario Commission on Reform of Public Finances said that half of Ontario’s budget is spent on wages and benefits in the overall public sector. It is reasonable to assume other provinces incur similar, proportionate costs.

So how has Alberta done on keeping program spending (and thus compensation costs) in check? Not very well.

Let’s compare from 2005 forward, the boom years, at which point per capita program spending was already significantly up from the mid-1990s lows.

Back in 2005, the Alberta government spent $9,594 per person on programs. By the current year, that jumped to $10,526 per capita, almost a 10 per cent rise in real per capita terms (and again, adjusted for inflation).

What Alberta did over the past eight years was akin to someone who assumes a large Christmas bonus given in one or two years will reappear every year — and then buys an expensive house with permanently higher mortgage payments. That’s exactly what Alberta’s government did when it committed to ever-higher program spending in the boom years.

Now consider this simple question: How would Alberta’s finances look now, even with the revenue decline, if the province had increased program spending since 2005, but in line with inflation and population growth? Crunch those numbers and you find that Alberta spent an extra $22.1 billion beyond that parameter.

Had the province stuck to inflation plus population growth increases since 2005, Alberta would have enjoyed surplus budgets, including during the recession and in this present fiscal year. Instead, the province has recorded five straight deficits and is heading for its sixth deficit year.

Part of the problem has been the generous collective agreements the province has signed.

For example, in 2007, the province signed a five-year deal with the teachers’ union that provided for raises over that period that were double the rate of inflation, even though Alberta’s teachers were already the best-paid in the country. The province also took over billions in unfunded liabilities in the Teachers’ Pension Plan that had previously been the responsibility of teachers.

Both very generous gestures, to be sure, but very costly deals for taxpayers.

Recessions and economic cycles are inevitable, as it the inevitability that provincial revenues, in any province, will occasionally drop. The critical question is whether a government is prudent enough in advance to avoid overstretching itself on the program spending side of the ledger.

In Alberta’s case, the answer was "no." Alberta’s red ink experience should serve as a warning to the rest of the country: Watch your collective agreements with the public sector. They can come back to haunt you.

Mark Milke is director of Alberta policy at the Fraser Institute and author of Alberta’s $22-Billion Lost Opportunity: How Spending beyond Inflation + Population Created Alberta’s Red Ink.

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